The IMF’s Absurd Calculations Of Fossil Fuel Subsidies: It’s Really Not $2,200 For Every American

You can tell when there’s one of these climate change conference things coming up. Every organisation in the world starts to come out with the most absurd estimations of how much climate change will cost us, how much we’re subsidising those nasties over in the fossilFOSL -6.25% fuel industry and so on and on and on.

And yes, at the end of this year all those climate campaigners get to fly off to Paris (lovely city, great place to hold a conference!) to try to tell us all how we must live our lives. As part of this process we’ve now got the IMF telling us that actually, we’re all subsidising the use of fossil fuels by some vast amount and really, this just must stop. Yet their calculations are absurd. We must therefore put them over in the box marked “political propaganda” rather than that much more useful box marked “economic evidence for public policy”.

Please do note that this isn’t an argument about climate change itself: that’s not my subject matter at all here. For the record, and I’m on record as having been saying this for a decade now, climate change is happening, it’s a problem we should do something about, we’re causing it and the solution is a carbon tax. So, let’s have that carbon tax and be done with the problem.

Having got that out of the way, this is an argument about the economics of what is being defined as a subsidy. And given that we do in fact want to solve problems we need to have good evidence about what the problems are, their extent, so that we can devise solutions. At which point we’ve got to say that the IMF isn’t really helping us in that task.

Typically for The Guardian they manage not even to get their headline right. The report says absolutely nothing at all like that: absolutely nowhere does it say that the G20 countries are paying anything like that at all.

Subsidies for fossil fuels amount to $1,000 (¬£640) a year for every citizen living in the G20 group of the world’s leading economies, despite the group’s pledge in 2009 to phase out support for coal, oil and gas.

New figures from the International Monetary Fund (IMF) show that the US, which hosted the G20 summit in 2009, gives $700bn a year in fossil fuel subsidies, equivalent to $2,180 for every American.

That’s very slightly better but not much.

The IMF’s actual argument is that by not taxing certain consequences of fossil fuel use then therefore there are subsidies going to fossil fuel use.

The IMF, which published a global estimate ‚Äì $5.3tn a year ‚Äì of fossil fuel subsidies in May, calculates that ending fossil fuel subsidies would slash global carbon emissions by 20%, a huge step towards taming global warming.

And that’s not true either. It’s actually the IEA that makes that 20% estimate and that’s from eliminating what we would all call “real” subsidies.

So, let’s work through the three different things that we might call subsidies. The IMF report is here and the spreadsheet they offer of the full figures is worth a look. We’ll stick with just the US numbers as illustrations. Please do note again that this is nothing at all to do with any discussion of climate change. We’re talking about the proper economic identification of what is a subsidy here.

The first is what we can call “pre-tax subsidies”. This is deliberately making fossil fuels cheaper for the consumer by providing a direct subsidy. Venezuela, for example, buys gasoline on the world market (domestic supplies aren’t large enough to meet demand) and then literally gives it to the gasoline stations who then sell it at an absurdly low price. This is a real, direct, subsidy. There’s about $500 billion of this around the world and that’s what the IEA says we should stop in order to reduce emissions by 20%. And they’re right of course, although it’s not really something that “we” can stop, because the rich countries don’t really do this. Almost all of this is off in the oil producing and some middle income countries. They should stop it, sure, both on climate grounds and also on the grounds of simple good sense. But short of a decent burst of colonialism this isn’t something that we get a say in. For example, from the IMF spreadsheet, for the US this amounts to about $13 billion a year. $40 a a year per American: yes, probably a better idea if this didn’t exist but it’s hardly a game changer.

The second set of “subsidies” is taxes that probably should be levied but aren’t. The IMF’s range here goes from stuff that is pretty much standard economics and sensible to stuff that’s really a stretch to describe that way. The costs of air pollution and climate change: yes, the standard economists’ toolbox says that consumers should be paying for the cost of these. We should be imposing a Pigou Tax (this is very much mainstream stuff, Greg Mankiw signs on to it for example) to make people pay the costs of their actions that impact upon others. No, it’s not compensation: we’re trying to alter the price system so as to include the costs of the damages in the prices that people pay for their actions. We should, as part and parcel of the idea, reduce other taxes by the same amount. Thus, for example, Greg Mankiw’s suggestion of adding a $1 per gallon to the federal gasoline tax. This should become general revenue, not go into the Highway Trust Fund, so that we can indeed lower other taxes by the same amount (a favourite is to introduce a personal allowance for FICA taxes, as with the way that the first $xthousands are free of income tax).

This is all very much standard economic analysis of this field and is the result we get from the Stern Review, from William Nordhaus, Richard Tol, John Quiggin, in fact from every serious economist who hsa ever looked at this problem. James Hansen would even sign on to it, even though he’s a bit ambitious at the rate that should be charged. Amazingly, there’s even an indication that such a revenue neutral carbon tax has some support among Congressional Republicans if you can imagine that.

Things start to get a little wilder with this:

The energy subsidy estimates reported here are based on the broad notion of post-tax subsidies, which arise when consumer prices are below supply costs plus a tax to reflect environmental damage and an additional tax applied to all consumption goods to raise government revenues.

It’s the second part of that, “additional tax applied to all consumption goods”. That’s the IMF insisting that some certain amount of government expenditure should be covered by consumption taxation, sales tax or VAT for example. And there’s good reason that they should say so: consumption taxes have lower deadweight costs than income taxes for example. So, we do less damage to the economy by funding government through consumption taxes than we do by funding it through income taxes. Great: but it’s also true that sales taxes are regressive and income taxes are progressive. It’s this which has the United States tax system as being very much more progressive than any of the European tax systems.

A little note here, progressive doesn’t mean high tax rates. It is a measure of how much more of their income the rich pay in tax than the poor do. Over here in Europe total tax rates on the poor are higher as a percentage of income than they are on the rich. Because of VAT and high sin taxes. The American system has much lower sin and sales taxes (some states don’t have a sales tax at all) meaning that much more of the tax collected comes from the income tax and that’s a progressive tax. Thus the rich in the US pay a higher portion of their total income in tax than the poor do. Another way to put this is that progressivity is measured by average tax rates, not marginal.

Now, whether you have a progressive or a regressive tax system is obviously a political choice. And what the IMF is doing here is insisting that the US should be following their desired (ie, more efficient but possibly less fair) tax system by having a more regressive taxation system.

Uncle Sam is being put on the naughty step for having a progressive tax system. And that’s not really what we think of as a subsidy to fossil fuels now, is it?

So there’s a range there from sensible to not very sensible at all really definitions of subsidy.

And then we get on to things which simply are not subsidies to fossil fuels at all.